by

Chairman Mary Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
August 31, 2011

The next item on our agenda involves two companion releases requesting public comment on the treatment of asset-backed issuers and the treatment of real estate investment trusts and other mortgage-related pools under the Investment Company Act.

Treatment of Asset-Backed Issuers Under the Investment Company Act

The first of these companion releases is an advance notice of proposed rulemaking regarding Rule 3a-7. That rule, adopted in 1992, provides an exclusion from the definition of “investment company” for certain asset-backed securities issuers. This is important because an entity that is excluded from this definition is exempt from the requirements of the Investment Company Act.

To rely on this exclusion, ABS issuers must meet conditions designed to appropriately distinguish these vehicles from mutual funds and other registered investment companies.

In addition, the rule contains conditions designed to provide for the safekeeping of assets and some level of independent oversight – both of which are traditional concerns under the Investment Company Act.

Also, among the conditions of the rule, are several references to credit rating requirements.

We have been examining Rule 3a-7 in the context of the mandate under the Dodd-Frank Act to review and remove credit ratings from our rules and substitute other appropriate standards of creditworthiness.

Unlike our other rules, Rule 3a-7 does not use credit ratings to serve as standards of creditworthiness. Instead, the ratings review by the ratings agencies was intended to serve as a type of proxy for addressing traditional investor protection concerns under the Investment Company Act. Our review therefore has focused on substitutes to enhance investor protections, as opposed to substitutes for creditworthiness.

In addition, given that the rule is nearly 20 years old, that the asset-backed securities market has experienced tremendous upheaval, and that the primary regulatory regime for asset backed securities is being substantially revised by the Dodd-Frank Act and SEC rulemaking, we are inviting public comment on Rule 3a-7.

Among other things, we are requesting comment on ways to update and improve the conditions applicable to the exception for certain asset-backed issuers under the Investment Company Act. We want to assure that our investor protection concerns are appropriately addressed by the rule’s conditions, taking into account various other regulations that are applicable to ABS issuers, including Regulation AB. Among the ideas we discuss is requiring an ABS issuer to undergo an independent review to protect investors in asset-backed securities from self-dealing and overreaching by insiders, in lieu of the credit rating requirement currently in the rule.

Treatment of Mortgage-Related Pools Under the Investment Company Act

In a companion concept release, we also are requesting public comment on ways to update our interpretation of section 3(c)(5)(C) of the Investment Company Act. That provision is relied upon by some real estate investment trusts, known as REITs, and other mortgage-related pools engaged in the business of acquiring mortgages and mortgage-related instruments.

However, certain asset-backed issuers, particularly those backed by mortgages also potentially rely on this provision. So it is helpful and instructive for the Commission to request comment on the treatment of asset-backed issuers and mortgage companies in tandem.

In addition, the exception for REITs and other mortgage-related pools under the Investment Company Act is an area of the law that has not received significant focus from the Commission over the years. Indeed, the last time the Commission issued a formal interpretation in this area was in 1960, upon the emergence of REITs.

Needless to say, tremendous changes have occurred in the mortgage markets, the securities markets, and the regulatory environment in the intervening five decades. As a result, we are taking this opportunity to seek public input on whether Commission guidance, and the few staff interpretations regarding the status of mortgage-related pools under the Investment Company Act, should be updated or made more clear and comprehensive.

We do this with a view that, in some cases, certain REITs and potentially other mortgage-related pools relying on the exclusion can to some investors – particularly retail investors – look very much like traditional investment companies.

I look forward to public comments on the nature of the REIT and mortgage markets as well as input on the clarity, scope and even the relevance of our existing guidance.

Before I turn it over to the staff, I would like to thank those who developed the releases before us today.

This group was assisted by Mark Cahn, Meridith Mitchell, David Blass, Lori Price, and Bob Bagnall in the Office of the General Counsel; Craig Lewis and Stas Nikolova in the Division of Risk, Strategy, and Financial Innovation; Elizabeth Sandoe and Josephine Tao in the Division of Trading and Markets; and Meredith Cross, Paula Dubberly, Kathy Hsu, Rolaine Bancroft, Karen Garnett and Michael McTiernan in the Division of Corporation Finance.